why banking infrastructure needs to change
As technology has evolved and opened up new possibilities for how businesses and consumers interact with their financial services provider, neo-banks, fintechs and increasingly non-financial brands have paved the way for innovation.
However, much of this technology relies on traditional banking infrastructure, which is largely outdated and inadequate.
In this series of blogs, my goal is to unpack the problems with traditional infrastructure, how it fails to meet the needs of those who depend on it, and what needs to be done about it.
This time we will examine the reasons Why the banking infrastructure must change, exploring the ways in which it impedes business.
How banking infrastructure is a floating anchor for fintech
All financial services offerings, no matter how innovative or revolutionary, must operate on global banking systems – a combination of traditional institutions, their bank accounts, and the settlement of payments between them. This fundamental layer of infrastructure underpins everything in the financial industry – and it is now very old.
The result is the technological equivalent of a sea anchor, which throws a wide range of inhibitors to good service, innovation and bank efficiency. Examples include traditional business hours and weekends that still prevent true 24/7 service; information about payments minimized because old infrastructures can’t handle more than tiny amounts of data; opacity and risk in cross-border banking; and general delays everywhere. This outdated infrastructure hinders business innovation and growth in a variety of ways:
- Risk: traditional banks are primarily lenders. They provide banking infrastructure almost as a by-product. Because they are vulnerable to economic shocks and downturns – like the 2008 financial crisis – they can create challenges for processing basic banking services that have nothing to do with lending. For example, operational funds held with these institutions are exposed to market events and business risks. A totally unnecessary risk to introduce into the practice of providing financial services infrastructure.
- Competitive: traditional banks often promote competition with new banks, fintechs and emerging players for their end users, while serving them. This competition will never create a real reliable partnership.
- Rigid: Often averse to change, the traditional rigidity of banks prevents innovators from offering new technologies and new services to their customers. Old technology designs make change extremely risky, resulting in market-wide changes that often take decades to unfold: the very antithesis of the fintech creed.
- Expensive: There are many layers to the banking infrastructure, which are often incredibly expensive to adapt or change for other financial service providers looking to deliver new technology that uses the banking infrastructure as a foundation.
- Resistant: Traditional banking has always had a conservative and resistant response to disruptive yet innovative changes in the financial landscape, such as DeFi, working against such innovations rather than supporting them. The drivers are both cultural and practical: a traditionally slow-moving industry running on very old technology that is expensive and risky to change.
- Disjointed: for cross-border payments, there are often significant difficulties due to long waiting times for transfers or costly exchange processes. This is due to the fact that each country has set up a different banking infrastructure. To compound this situation, traditional banking technology is being challenged by compliance costs in many emerging markets. This has led to a global downturn in international banking networks, with incumbent banks choosing to de-risk their networks rather than strengthen them.
These barriers can create significant problems not only for existing vendors, but for emerging vendors as well. However, for emerging providers in particular, traditional banking infrastructure has a number of unique drawbacks:
- Slow: Due to traditional methods being locked in by old technology, setting up new end users and business accounts can often take weeks, with lengthy verification and registration processes. For example, credit scoring is slow and cumbersome, and API integration particularly difficult for many banks.
- Constrained: legacy technology carries with it the DNA of 20th- and even 19th-century banking, which is extremely expensive and risky to adapt and maintain. The original developers of many banking systems are long dead or retired; their 1960s code still in place, layered and corrected year after year. As a result, many banks spend most of their technology budget fixing and managing this old technology, and lack the resources to keep pace with customer needs and serve them creatively.
- Unplugged: When businesses expand internationally, slow, limited and opaque cross-border banking services make it much more difficult to create seamless and fast service for customers – something people around the world expect from advances in information. and telecommunications.
Fundamentally, banking infrastructure needs to change to better support fintechs, new banks, and financial service providers, rather than acting as a sea anchor and creating barriers to innovation. This change will allow the emergence of new technologies and pave the way for the next generation of financial services.
In this blog series, we will discuss…
Over the next few months, we’ll explore the key areas impacted by banking infrastructure, with the next episode focusing on payment rails and why improving this part of banking infrastructure needs to be high on the list.
The goal of this series is to help businesses better understand how to overcome core systems constraints and how they can deliver the financial services of tomorrow.